How Large Tesla Option Traders Are Playing The September Sell-Off

Tesla Inc TSLA rebounded by 11% on Wednesday after logging its worst day in history on Tuesday. Tesla shares are now down 27% in September, and option market activity on Wednesday suggests some deep-pocketed traders are taking notice.

The Tesla Trades: On Wednesday morning, Benzinga Pro subscribers received 13 alerts related to unusually large Tesla option trades. Here are the largest:

• At 9:30 a.m. ET, a trader sold 308 Tesla call options with a $300 strike price expiring on Friday. The contracts were sold near the bid price at $57.717 and represented a $1.77 million bearish bet.
• At 9:38 a.m. ET, a trader sold 458 Tesla call options with a $390 strike price expiring on Friday. The contracts were sold near the bid price at $5.158 and represented a $236,236 bearish bet.
• Less than a minute later, a trader sold 318 Tesla call options with a $330 strike price expiring on Sep. 25. The contracts were sold near the bid price at $51.601 and represented a $1.64 million bearish bet.
• At 10:57 a.m. ET, a trader bought 544 Tesla call options with a $330 strike price expiring on Sep. 25. The contracts were purchased near the ask price at $46.667 and represented a $2.53 million bullish bet.

Of the 13 total large Tesla option trades on Thursday morning, only two represented calls purchased near the ask, trades typically seen as bullish. Eight trades were calls sold at the near the bid or puts purchases at or near the ask, trades typically seen as bearish. Three trades were executed near the midpoint of the bid-ask spread, which is typically considered neutral.

Why It's Important: Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader. Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size of the largest Tesla option trades, there’s certainly a possibility they could be an institutional hedge on a large position in Tesla stock.

Tesla Bubble Bursting? Tuesday’s historic crash in Tesla stock comes after S&P opted not to include Tesla in its popular S&P 500 index on Friday afternoon. S&P shunning Tesla means fund managers will not be forced to buy Tesla shares to rebalance their holdings in the near future, an idea which has been a major catalyst for the stock since it first became eligible for the index by reporting a profitable second quarter.

S&P did not comment on the reasons why it decided to exclude Tesla, although Tesla critics have pointed out that Tesla was only able to meet the index’s profitability requirement by selling regulatory credits rather than generating positive net income from its core auto business.

In addition to its S&P disappointment, Consumer Reports said it has “significant concerns with the newer features” of Tesla’s $8,000 full self-driving package in a scathing new review last weekend.

Benzinga’s Take: The majority of the large option trades on Wednesday morning were bearish, but Tesla investors can take comfort that the largest trade of the morning was bullish. The $2.53 million call purchase has a break-even price of $376.67, suggesting about 8.7% upside for the stock in the next two-plus weeks.

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